Attorney Paula Goedert on Clearing Up Associations’ Conflicts of Interest
In the association world, making decisions that could have legal implications necessitates more than just knowing what is legal and what is not. Yes, sound decisions require a firm understanding of law and regulations. The best decisions, though, require an extra step — an honest assessment of what an association wants to be and how it wants to be perceived by the industries or professions it serves. It’s a delicate balancing act that can have profound consequences — positive and negative. Fortunately, Paula Goedert’s “sense of balance” is finely tuned when it comes to association-focused legal issues.
A partner in the Chicago office of Barnes & Thornburg LLP, Goedert chairs the firm’s Associations and Foundations Practice Group. As such, Goedert serves as general or lead counsel for a number of leading trade associations ranging from the American Architectural Manufacturers Association and the American College of Surgeons to the Bank Administration Institute and the American Library Association.
Goedert’s expertise and reputation has not gone unnoticed. Not only is she a past winner of the Association Foundation Group’s President’s Award, she was the recipient of the John C. Thiel Distinguished Service Award from Association Forum and has also been named that organization’s Associate Member of the Year. She has served on the Association Forum's board of directors, the board of the American Society of Association Executives (ASAE) Foundation, and has also chaired the ASAE’s Legal Section Council.
In addition to her busy lecture schedule, she has authored a myriad of articles on such non-profit and association topics as governance, lobbying by exempt organizations and the legal status of chapters. She recently sat down with Board Forward to discuss what she feels is one of the most pressing issues facing associations today: conflicts of interest. What follows is our chat:
BOARD FORWARD: Why are conflicts of interest front and center for association boards today?
PAULA GOEDERT: Because Congress and the press are riling up the public about conflicts of interest. The New York Times, the Wall Street Journal and a number of members of Congress are getting stories in the newspapers about associations that let conflicts of interest steer their judgment calls.
BF: Why do you think that is? What’s driving it?
PG: Headlines. A conflict of interest makes it look like there is something shady going on. So, even though it may be perfectly legal and moral, both Congress and the media can make a good story out of an association transaction that involves a conflict of interest.
BF: Can you point to an example?
PG: For the last five years, both the Wall Street Journal and the New York Times have used stories about authors of articles in association publications who have not sufficiently disclosed conflicts of interest, allegedly to steer business in exchange for consulting fees. Those two newspapers are also publishing stories on associations that put out white papers favoring commercial enterprises and also accept sponsorship money from those same companies.
BF: Do the Journal and the Times come at it from different angles? The perception, after all, is that the former skews right while the latter tends to lean left.
PG: Not really. I think they both view it as a public service to point out real and imagined conflicts of interest in the association world.
BF: So, what exactly is a conflict of interest?
PG: A conflict of interest is a personal or financial interest that might prevent a person from putting the best interests of the association and its members first. It might be a business interest. It might be a membership on another board. Or, it might be an employment relationship of a family member.
BF: Can all such conflicts be handled with disclosure and recusal?
PG: Legally, disclosure and recusal is always required. It is my opinion that many conflicts cannot be solved with disclosure and recusal, because some conflicts just look so bad that the association will tarnish its reputation if it continues down the path of a transaction involving a conflict of interest.
BF: In that event, what is the best course of action?
PG: You really have to judge how your constituencies are going to view the conflict. If your membership or your donor base is going to think that there is something shady going on, then you have to stop and not go down that path. The most important asset that a board member is protecting is the good will of the organization. Even if a transaction is going to bring in money, it may not be worth it if it tarnishes the association’s good will.
BF: Can you give an example of a board that has mishandled such a situation?
PG: We have a client that accredits programs. A member of the accreditation committee had been a former consultant for a particular program. Our advice was that she should recuse herself from the panel that was to make decisions related to that university. The accreditation committee said that because she was a former consultant, she didn’t need to recuse herself. “There was no current conflict,” they said. They did not take our advice and left her on the panel. The panel then denied accreditation and the university sued on the grounds that – surprise – one of the panel members had a conflict of interest! Indeed, it turned out that the university had fired her, and they said, “She’s prejudiced against us, because we fired her.” So, I always advise my clients to take the conservative path when it comes to conflicts of interest.
Another client was presented a business venture by a group of association insiders. The proposed transaction would have put the association in partnership with its leaders, with all parties contributing money. We advised them that it was a bad idea, because some portion of the membership base would assume that the insiders were getting a sweetheart deal. No matter how many valuations you had and how many experts you brought in, some portion of the membership base would always think there was something shady about the deal. But they couldn’t bring themselves to say “no” to the insiders and spent a lot of money going down the path before cooler heads prevailed and determined that membership would not like the deal.
BF: Well, at least they came to the right conclusion eventually.
PG: Yes, but it was costly.
BF: On the flipside, can you provide an example of an association board that got it right?
PG: Another of our clients was approached by the president-elect, who offered to become a paid consultant for the organization in a new business venture. It was a very attractive offer, and the board thought they could make money at it. But we advised them not to do it, because – again – a portion of the membership would think it is a sweetheart deal. They backed off and waited until this volunteer had gone all the way through the line of succession. They also put a one-year gap period in there. They then went back to him and asked, “Are you still willing to talk to us?” He was, and they did the transaction at that point. The membership could then be told, “He approached us earlier, and we put him off until he was outside the circle. We then reconsidered the deal.”
BF: It sounds like you have to employ a lot of psychology when you are doing your advising and dealing with different personalities, yes?
PG: It’s funny you should say that. I often advise young people thinking of going to law school that they should major in accounting and double minor in theatre and psychology. I’m really not joking when I tell people that!
BF: How do conflicts of interests fit with a board’s fiduciary responsibilities?
PG: A conflict of interest has the potential to damage an association’s good name. Every conflict situation has to be closely examined and acted upon conservatively to protect the good name and good will of the organization. It’s not just about the money. It’s about the reputation. The reputation is the hardest asset to get back once you lose it.
BF: Since you have made dealing with associations and protecting their interests your career specialty, was there some advice given to you early on about how best to deal with association boards and leadership?
PG: People want to do the right thing. Sometimes they need an outside voice to help them understand what the right thing is. The attorney is often put in the position of having to be that voice of reason or moral judgment, even when it’s not a purely legal issue. A board will often turn to their legal counsel and expect the lawyer to tell them, “In this situation, what is the right thing to do?”
BF: What do you see in the last part of 2013 and into next year as being a hot legal topic that association boards should monitor?
PG: Outside of conflict of interest, the hottest topic that I see for associations is the ownership of intellectual property. Because everything is up on the Internet, most Americans assume that you can take it and use it for free. That’s not true. If you can read it, somebody owns it. And in most circumstances, you have to get permission before you can take it. Too many volunteers don’t understand this, though. They think if you can see it and if it’s downloadable, then you can use it without permission. Many associations get into trouble because volunteer leaders submit content for publication that are actually “borrowed” from others. Because of search engines and the ability to find things easily on the Internet, the owner sees where their content has been “borrowed,” and the association receives a demand letter. Associations have to pay a lot of attention to make sure their volunteers who write content for them understand copyright basics.